The Economist: Texas' budget surplus

The state of Texas has a budget surplus, thanks primarily to the strong economic recovery (with a huge assist from the energy sector). In addition to this "money in the bank," legislators will have more dollars to spend as they craft the 2014-15 budget based on projected revenues that will be flowing into state coffers over the next two years.

The Texas Comptroller of Public Accounts is charged with the task of presenting an estimate of available revenue for the upcoming biennium to the Legislature and governor. On Jan. 7, Comptroller Susan Combs indicated that revenue available for general purpose spending would total $101.4 billion for 2014-15.

Part of this amount is the money left over from last time; the estimated ending balance for 2012-13 was $10.5 billion. About $8.8 billion of that is available to use after setting aside $1.7 billion from last year's oil and gas production tax revenue for the Economic Stabilization Fund (commonly known as the Rainy Day Fund) as required by the Texas Constitution.

Expected collections come to $96.2 billion with almost $54.9 billion from sales taxes. Another $7.9 billion stems from motor vehicle sales and rental taxes and almost $5.6 billion from the franchise tax. Together, oil and natural gas production taxes add up to $7.1 billion.

Some $3.6 billion of the total collected is slated for the Economic Stabilization Fund based on collections during the 2014-15 biennium. These numbers could be adjusted in either direction as the session wears on but not by a large amount.

Other money flows through the state system (like federal funds that come in and are dedicated for various purposes), but the $101.4 billion is the amount that will be spread across the spectrum of state agencies and programs largely at the discretion of the Legislature.

To put the $101.4 billion in perspective, it's a notable jump from January 2011, when predicted collections were $77.3 billion and a down economy had left a shortfall from the prior two years of $4.3 billion. Lawmakers were left with just $72.2 billion to spend. While that number did edge up a little as the economy began to turn around during the spring of 2011, and the comptroller revised the likely revenue figures, substantial cuts to programs and gimmicks were used to balance the budget.

These projections of revenues and expenses are, of course, fraught with difficulties. They are driven by business activity and a swing in the economy can shift both revenues and expenses. Moreover, they tend to move in opposite directions to some extent, with bad times both reducing revenue and increasing the need for certain services. As a result, there is an overarching theme of caution in the minds of many. The comptroller puts it this way: "We'd all do well to remember the dramatic drop in revenues that occurred during the recession just as we recognize the dramatic sharp increase that has happened recently."

It's hard to argue with that. As a forecaster from way back, I am all too aware of the pitfalls and the need for responsible spending. Even so, leaders are justifiably more optimistic this time around, with pledges by some to get more money into schools and other services that were hit hardest by the 2011 cuts.

Others prefer tax cuts, which is politically popular but likely economically imprudent given the fundamental structural flaws in the tax structure (which were masked this year by the incredible resurgence in the energy sector) and the extreme volatility in recent years.

Although intense budget debate is a virtual certainty even with a little more breathing room, the fiscal situation is clearly better than what we faced in 2011. Setting aside funds for inevitable business cycles is an idea with merit, but it should be balanced against investing in the future of the state.

It makes little sense to underfund key priorities such as education, water, infrastructure and health care, for example, which have the potential to pay for themselves in terms of prosperity down the road. The economic interests of Texas (both today and in the decades to come) are best served by policy which is fiscally responsible, yet realistic and mindful of long-term interests.

Dr. M. Ray Perryman is president and chief executive officer of The Perryman Group (perrymangroup.com). He also serves as Institute Distinguished Professor of Economic Theory and Method at the International Institute for Advanced Studies.